Chances are it’s a lot more than you think, with Work Institute estimating the cost to business is $600 billion each year.
The good news is that in this post we’re going to show you exactly how to calculate the true cost of turnover (the easy way).
Given that you’ve landed on this article, I’m guessing that you might have a turnover or maybe you’re not sure. Either way, need to know why your staff are leaving.
The second piece of good news I’ve got for you is that I’ll be showing you how to work that out too, so you can develop a strategic, targeted employee retention strategy, that actually works.
Let’s get started.
What is employee turnover?
It’s best to learn to walk before we can run, so before we get into the nitty-gritty, let’s cover some of the basics.
Employee turnover is defined as the loss of employees who need replacing from an organization over a period of time.
Your employee turnover rate is simply the no. of employees who’ve left during this time divided by the total no. of employees in your organization, as a percentage i.e.
(No. of employees who’ve left / total number of employees ) x 100
Employee turnover vs employee attrition
So, what’s the difference between employee turnover and employee attrition then?
Sometimes you’ll see employee attrition and employee turnover split out in the following way:
Employee turnover is when an employee who needs to be replaced leaves an organization. This is thought of as preventable (or regrettable) turnover and can be costly. It’s usually directly related to the job or organization, say if an employee isn’t happy with their role, manager, team, culture, work environment, or conditions.
Employee attrition, in this context, is what happens when staff who leave their position aren’t replaced i.e. through retirement, sickness or lay-offs/redundancies.
At intelliHR however, we use attrition and turnover interchangeably to refer to all staff who leave and then we split it out by the type of turnover so that we can track and filter all staff who leave in more detail (and get better insights on the other side)!
Types of employee turnover: Involuntary vs voluntary turnover
When an employee resigns of their own accord, this is known as voluntary turnover. If they’re terminated instead, this is involuntary turnover.
You can see some of the various types of voluntary and involuntary turnover tracked in this particular intelliHR account below.
"Don’t forget that turnover isn’t always bad! In fact, up to about 10% is helpful to keep the flow of new ideas and talent into the organization."
When an underperforming or problem employee leaves (whether voluntarily or involuntarily), this can actually be healthy for a business, as they no longer have to ‘carry’ them (which can end up being very costly).
How much does staff turnover cost?
Short answer: a lot.
Depending who you ask, turnover is said to cost anywhere from 30-150% or 6-9 months worth of the employee’s salary. To give us something concrete to work with, Work Institute pegs this figure at 33%.
Why so expensive?
Because there are both immediate costs associated with the staff member leaving and finding their replacement, and then the additional costs that are incurred while the new staff member gets up to speed.
A new employee doesn’t start being profitable to a business until at least the end of their onboarding, as you can see on the employee lifecycle curve below (the ROI critical control point). Once they reach this point, their profitability continues to increase as they move towards peak profitable performance.
Consider these costs associated with turnover.
The cost of a staff member leaving:
- Productivity decline during a staff member’s notice period
- Sick days taken (disengaged employees have a 37% higher rate of absenteeism than engaged ones, according to Gallup)
- Gaps/disruption to the business and team if the position is left unfilled or other team members have to pick up the slack
- Impact on culture, loss of morale or the negativity that an exiting staff member sometimes spreads (and can be quite contagious)
- Customer experience – the disruption of a customer’s relationship with the employee or their experience with a new and inexperienced person.
The costs to replace an employee:
- If recruiting internally, the opportunity cost of the time of those who are involved (i.e. the hiring manager’s time spent interviewing)
Costs onboarding a new staff member:
- Opportunity cost of the time of the new starter and other staff involved in onboarding and training
- Lower productivity and mistakes while they ramp up to peak performance
- Strain on current team members to support
- Culture/team disruption
How to calculate the cost of employee turnover (with bonus employee turnover calculator)
“63% of organizations don’t measure the financial cost of employee turnover”.
Ignorance is bliss, right? Not in this case. Only once you understand what the true cost of attrition or turnover to your business is, then can you start investing resources to do something about it.
In this section, we’re going to step you through exactly how to calculate the cost of employee turnover for a single employee, and throughout your business.
Although it’s always good to understand how a figure is arrived at, if you’re not about the math (no judgment here), then feel free to take a shortcut and skip to our easy Employee turnover cost calculator (which will do it all for you) (scroll down to the ‘calculator download’ to get the good one).
Step 1. Calculate your employee turnover rate
As mentioned before, your employee turnover rate is the number of employees who’ve left over say, the last 12 months, divided by the total number of employees at your organization, multiplied by 100.
(No. of employees who’ve left in time period) / total No. of employees) x 100
So if you’ve had 24 employees who have left during the last 12 months out of a total of 120 employees, your annual turnover rate is 20%:
(24/120)*100 = 20
What’s a healthy turnover rate, I hear you ask? That really depends on your individual organization and industry. For example, the turnover in a fast-paced, high-pressure role like a contact center is likely to be much higher than a public service role, like the police.
Okay, okay, if you really want a figure, here it is. In a survey of 500+ HR professionals, the AHRI found the average turnover rate was 18%, with:
- Two thirds saying 10% was an ideal turnover rate
- The other third showing an increasing tolerance of a rate closer to 20%
- Turnover rates steadily increasing for all businesses, except those with 500-1000 headcount
- Turnover rates highest for organizations with less than 100 headcount
As a basic rule: If lots of your employees are leaving before the end of their first year, or if you’re spending too much time replacing lost employees then that’s a pretty good indication that your turnover rate is too high!
I once worked for a company who didn’t order business cards for new employees until the end of their first year because they had so many leave before then. Now that’s a huge indication there’s a turnover problem!
Step 2. Add up all your costs
Next we add all of the other direct and indirect costs incurred when hiring and training a new starter.
We need to consider the salaries of all of the people involved in hiring and onboarding the new employee here. At a basic level, that is likely to include:
- New employee salary e.g. $80,000 = $42.86 hourly rate
- Supervisor salary e.g. $130,000 = $71.27 hourly rate
- HR officer salary e.g. $ 70,000 = $38.38 hourly rate
- Recruitment agency fees and commissions (usually 10-15% of new hire salary) – $10K
- Advertising the vacant role e.g. $500
- Opportunity cost of time spent interviewing candidates e.g 6 hours of interviews =
- Supervisor: 6 hours x $71.27 = $1,283
- HR officer: 6 hours x $38.38 = $691
- Administration e.g payroll, reference checks, testing, usually 3-7 days work)
Onboarding, training and induction costs
- New employee’s salary during onboarding period (min 2 weeks/76 hours) = $3,333
- Orientation and on-the-job training
- Wage cost of supervisor while providing training (hourly rate x 3, minimum 1 week) (3 x 71.27) x 38 = $8,125)
- Wage cost of new employee doing on the job training (hourly rate x 3, minimum 1 week) (3x 42.86) x 38= $5000
- Any other mandatory courses, qualifications and annual training budget
Opportunity cost of unfilled role
- Lost productivity of resigning employee (minimum two weeks notice – $3333)
There’ll be a number of other costs we haven’t included here like payroll tax, insurance, qualifications etc, so take the time to sit down and talk with your team to identify what they are. If you think this is scary, that’s that’s not even taking into account the costs you can’t calculate, like the hit that culture or morale can take when a good employee leaves.
Step 3. Calculate the cost of turnover of a single employee
Add up all of the costs above and you’ve got the cost of that one employee leaving.
Tada! That’s $30,265 for a single employee.
Step 4. Calculate your organization’s cost of turnover
The next step is easy, simply multiply the cost of the single employee turnover by your turnover rate (20%) and you get $605,307. Not a drop in the ocean.
Preventing staff turnover
Staff will leave your business for a broad range of reasons (which we’ll get to in just a moment), but first, how do you figure out why staff are leaving in the first place?
You ask them! Seriously.
You’d be surprised at the number of organizations that don’t conduct exit interviews because it’s ‘too late – why bother?’.
But the feedback and insights you get from interviewing both the staff member who’s leaving can be absolute gold, and if you consistently do this with every employee who leaves, then you’ll begin to see issues and trends that might be occurring across your organization.
It’s helpful to automate exit interviews as with all the work involved in replacing the person, they can be easy to forget. In intelliHR, you can even schedule one to go out a month after they’ve left. It’s amazing the honest feedback you’ll get from someone once they’ve had some mental space.
Don’t forget to ask their supervisor too. It will help you to get a fuller picture of what’s going on, as well as encouraging the manager to actively reflect on the person’s departure and what they could have done differently.
But don’t wait until the exit interview to start collecting feedback! We are huge proponents of a continuous feedback model: checking-in with your employees regularly. Whether it’s through 1:1 conversations or pulse surveys organizations should be talking to their staff about their wellbeing, workload, loyalty to the company (i.e. eNPS surveys), as well as performance and goals. Because prevention is better than a cure 😉
Using HR analytics to understand turnover
If you’ve got good analytics in your people management platform or HR software, then capturing data like this over time will build up a rich picture of your organization as a whole, allowing you to use a number of tools to explore and pinpoint what might be going on.
- Sentiment analysis
Sentiment reflects how employees in your organization are feeling – check if it’s negative, positive, or neutral?
intelliHR’s sentiment analysis tools pulls together the data from all of your various surveys, pulses, diary notes, performance reports and check-ins, allowing you to see issues as they arise (rather than after the fact), where they’re happening (e.g. in a specific team or seniority level) and even predict who might be at risk of leaving.
This not only gives you the opportunity to have a conversation with high-risk employees before they’re too far gone, but also makes a good starting place for your employee retention plan.
For example in the graph below we can see that positive (green) and negative (red) sentiment increases in July, which is around the summer holidays. One explanation for this could be that those taking leave are happy and relaxed, whereas those who remain are stressed from the increased workload.
- Survival analysis
Want to know how long your staff are likely to stay in your business?
Survival analysis answers questions such as:
- What proportion of our organization is likely to stay with the business past a certain time?
- Given they reach a certain tenure, at what rate would we expect them to leave the business.
- Are there key points in an employee’s time with us where they are more likely to leave? (Eg between 6 and 8 years, employees are more likely to leave)
- Are there key parts of the business that have a better survival rate? What are they doing that we could use across the organization?
Why use survival analysis?
Looking at turnover rates in isolation can be misleading because they can be impacted by reporting periods i.e. downturn, seasonalities or an acquisition. Furthermore, it treats the turnover of someone who’s been at your organization for two months the same as someone who’s been there for 20 years.
Survival analytics groups all employees (those who’ve left and those who remain) by tenure to predict your turnover probability. In the graph above, we can see that the retention probability of a new starter (tenure = 0) is 1, and that it sharply declines to .8 after the first few months and gradually declines over the next 2 years. The probability plateaus until just after 6 years where it drops again.
This is useful for leaders to know the times when their team members might be disengaging and tailor strategies accordingly.
- Turnover analysis (aka the reasons why staff are leaving)
Turnover, or attrition analysis, allows you to pinpoint the factors that might be driving people to leave your organization. IntelliHR’s attrition analysis report collates all of your employee data (i.e. tenure, seniority level, pay grade, performance, feedback) to provide in-depth insights into your turnover.
The graph below shows the responses from exit interviews of both employees and managers – and it looks like career development and progression is a bit of a problem!
The most common reasons staff leave
- Career development and progression
According to AHRI, this was the main reason (63%) for employees leaving their organization. If your employees aren’t feeling like their career is going anywhere, or they’re bored in their role, you can’t blame them for not hanging around.
How to address it: Sit down with your team members to find out what their short, medium and long term goals are. Once you are aware of these, you can assist them to set smaller goals/OKRs to get them there. Goals should be a mix of work-related and personal/professional development goals.
How they meet those goals is up to both of you – you might set specific training courses for them to complete, or pair them up with a more senior staff member to shadow and learn from. The main thing is that they feel like they’re progressing, so don’t forget to check in regularly to ensure they’re on track and aligned and recognize their achievements.
- Poor company culture
Poor company culture is often what distinguishes a successful organization from an average one. A great culture invigorates staff, enhances collaboration, motivation, innovation, and growth, whereas a bad one can stifle them.
How to address it:
Talk to your staff! Check in with them through regular engagement pulse surveys to take a temperature check on how they’re feeling, and ask them what they want to see and how you can do better.
- Inadequate onboarding
“15% of employees have left a role due to a poor onboarding experience.” SHRM
15% of employees have left a role due to a poor onboarding experience.
First impressions count, and if you’re not doing it right, it’s costing you money. Not only does effective onboarding increase retention, but it also makes new starters more engaged and productive, which is more profitable for your organization!
How to address it:
Get your staff engaged and feeling the love before they even walk through the door with pre-starter emails, and then once they start, ensure they have a welcoming, organized, on-brand experience and make sure they feel like they’re achieving early on. The easiest way to do this is to automate your onboarding workflows so you can be sure to provide a consistent, high-quality experience for everyone (and so you don’t forget anything!). This includes welcome emails, compliance checks, training, and setting goals.
Bonus tip: why not put together a little welcome pack with a handwritten welcome note and some merchandise for their desk on the first day.
- Poor management
Ever heard the saying ‘staff leave managers, not jobs’? While this isn’t necessarily true for all staff who leave, it certainly is for some.
Take a look at your data to see if turnover is greater in any particular team and you might have a supervisor problem.
In intelliHR, you easily can filter turnover by supervisor, and while you need to bear in mind that this doesn’t tell the full story (e.g. it might be an issue with a team member, resourcing or workload), it’s a great place to start.
You can also combine this with other analytics pages, e.g. checking the span of control of that leader to make sure they’ve got enough time to support their team and aren’t spread too thin.
How to address it: collect feedback on a regular basis to see if there are trends across certain teams and what issues are occurring, to determine if it actually is an issue with the supervisor. Once you’ve isolated these factors, then you can determine what to next, whether that’s some additional training, coaching or a formal performance process.
Bonus tip: Often, feedback goes directly to a manager, so be sure to have alternative options for staff to provide feedback on their manager.
- Poor performance
Some underperformers can be coached back to good performance, others simply can’t, and these are the ones that you actually want to leave, as they are a cost to your business and can have a negative effect on other team members.
How to address it: Ensure you provide feedback through a performance feedback system with regular performance reviews (because annual performance reviews are a thing of the past), so that you can jump on performance issues before they become a problem and identify training or development needs.
- Lack of training
Lack of training can lead a newer employee to feel ill-equipped in their role, causing them to leave, but lack of training and development in employees who’ve been with you for a while can stagnate their growth and leave them feeling bored or unchallenged.
How to address it: the best way to find out what training your team needs, is to ask! Check-in with team members and leaders to see if there are any gaps in their skills and tailor your training and development programs accordingly.
Some employees will leave if they feel they’re not being fairly compensated or due to a lack of pay raises. Interestingly, pay isn’t the main reason employees leave. In fact, Glassdoor found that nearly four out of five employees prefer perks over pay increases, with this being stronger for younger age groups (18-34 year olds).
How to address it: Ensure you’re continually monitoring performance and achievement of goals so that you can be sure you’re fairly compensating your employees, when the time comes. Maybe that’s in the form of a performance-related bonus, or you might consider other non-monetary incentives such as:
- Health and wellbeing programs (i.e. gym memberships)
- Stock options
- Paid parental leave
- Flexible work hours
- Office perks (e.g. free lunch or coffee)
- Employee training and development
- Tuition reimbursement
- Increased vacation leave
Looking for more ideas? Here’s a full list of benefits and perks you can offer when budget is too tight.
- Unclear expectations
While goals that are too unrealistic can be demotivating, so too can lack of direction, goals or KPIs, or goal posts that keep moving and changing. And this might be a reason for staff leaving.
How to address it: Set goals and clear expectations from the get-go. Ensure all of your processes are outlined and create an environment of psychological safety so that your staff feel comfortable asking questions.
- Personal factors
Of course there are a range of other reasons that a staff member might leave, like family responsibility, poor work life balance or health reasons.
How to address it:
Although they’re ‘personal’ it’s still important to understand these causes, as there might be things that you can do to help, like implementing flexible working hours to help working parents or those who are studying, or a health and wellbeing plan that includes mental health days. And the best way to know what these causes are? Ask for feedback.
In summary – reducing employee turnover
So there you have it, now you know how to calculate the cost of employee turnover and figure out what might be causing it, hopefully, you can go about reducing it to a healthy, sustainable level. If you don’t take anything else from this article, remember that gathering feedback into a good people management tool is one of the most important ways to help you to understand why staff are leaving and pinpoint areas for improvement.